Exam 6: Risk and Return

Assume that in recent years both expected inflation and the market risk premium (r_M − r_RF)have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes?

(Multiple Choice)

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Question 101

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1)stock is zero.

(True/False)

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Question 102

Gardner Electric has a beta of 0.88 and an expected dividend growth rate of 4.00% per year.The T-bill rate is 4.00%,and the T-bond rate is 5.25%.The annual return on the stock market during the past 4 years was 10.25%.Investors expect the average annual future return on the market to be 12.50%.Using the SML,what is the firm's required rate of return?

(Multiple Choice)

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Question 103

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero,which is the risk-free rate.

(True/False)

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Question 104

Freedman Flowers' stock has a 50% chance of producing a 25% return,a 30% chance of producing a 10% return,and a 20% chance of producing a −28% return.What is the firm's expected rate of return?

(Multiple Choice)

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Question 105

Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each.The portfolio's beta is 1.12.Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80.What will the portfolio's new beta be?

(Multiple Choice)

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Question 106

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 107

In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are really interested in ex ante (future)data.

(True/False)

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Question 108

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

(True/False)

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Question 109

The slope of the SML is determined by investors' aversion to risk.The greater the average investor's risk aversion,the steeper the SML.

(True/False)

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Question 110

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 111

Your friend is considering adding one additional stock to a 3-stock portfolio,to form a 4-stock portfolio.She is highly risk averse and has asked for your advice.The three stocks currently held all have b = 1.0,and they are perfectly positively correlated with the market.Potential new Stocks A and B both have expected returns of 15%,are in equilibrium,and are equally correlated with the market,with r = 0.75.However,Stock A's standard deviation of returns is 12% versus 8% for Stock B.Which stock should this investor add to his or her portfolio,or does the choice not matter?

(Multiple Choice)

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Question 112

According to the Capital Asset Pricing Model,investors are primarily concerned with portfolio risk,not the risks of individual stocks held in isolation.Thus,the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

(True/False)

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Question 113

If you randomly select stocks and add them to your portfolio,which of the following statements best describes what you should expect?

(Multiple Choice)

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Question 114

DHF Company has a beta of 1.5 and is currently in equilibrium.The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%.Now the required return on an average stock increases by 30.0% (not percentage points).Neither betas nor the risk-free rate change.What would DHF's new required return be?

(Multiple Choice)

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Question 115

"Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.

(True/False)

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Question 116

Charlie and Lucinda each have $50,000 invested in stock portfolios.Charlie's has a beta of 1.2,an expected return of 10.8%,and a standard deviation of 25%.Lucinda's has a beta of 0.8,an expected return of 9.2%,and a standard deviation that is also 25%.The correlation coefficient,r,between Charlie's and Lucinda's portfolios is zero.If Charlie and Lucinda marry and combine their portfolios,which of the following best describes their combined $100,000 portfolio?

(Multiple Choice)

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Question 117

Portfolio AB was created by investing in a combination of Stocks A and B.Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is CORRECT?

(Multiple Choice)

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Question 118

Stock A has a beta of 0.8,Stock B has a beta of 1.0,and Stock C has a beta of 1.2.Portfolio P has 1/3 of its value invested in each stock.Each stock has a standard deviation of 25%,and their returns are independent of one another,i.e. ,the correlation coefficients between each pair of stocks is zero.Assuming the market is in equilibrium,which of the following statements is CORRECT?

(Multiple Choice)

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Question 119

Suppose that during the coming year,the risk free rate,r_RF,is expected to remain the same,while the market risk premium (r_M − r_RF),is expected to fall.Given this forecast,which of the following statements is CORRECT?

(Multiple Choice)

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Question 120

Showing 101 - 120 of 141

Exam 6: Risk and Return

Assume that in recent years both expected inflation and the market risk premium (rM − rRF)have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes?

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1)stock is zero.

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero,which is the risk-free rate.

Freedman Flowers' stock has a 50% chance of producing a 25% return,a 30% chance of producing a 10% return,and a 20% chance of producing a −28% return.What is the firm's expected rate of return?

Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each.The portfolio's beta is 1.12.Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80.What will the portfolio's new beta be?

Which of the following statements is CORRECT?

In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are really interested in ex ante (future)data.

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

The slope of the SML is determined by investors' aversion to risk.The greater the average investor's risk aversion,the steeper the SML.

Which of the following statements is CORRECT?

According to the Capital Asset Pricing Model,investors are primarily concerned with portfolio risk,not the risks of individual stocks held in isolation.Thus,the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

If you randomly select stocks and add them to your portfolio,which of the following statements best describes what you should expect?

"Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.

Portfolio AB was created by investing in a combination of Stocks A and B.Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is CORRECT?

Suppose that during the coming year,the risk free rate,rRF,is expected to remain the same,while the market risk premium (rM − rRF),is expected to fall.Given this forecast,which of the following statements is CORRECT?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Applications to Corporate Valuation

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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Assume that in recent years both expected inflation and the market risk premium (r_M − r_RF)have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes?

Suppose that during the coming year,the risk free rate,r_RF,is expected to remain the same,while the market risk premium (r_M − r_RF),is expected to fall.Given this forecast,which of the following statements is CORRECT?